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Health Care Reform Update and a Fiscal Look at Repeal

Almost a year after passage of the Patient Protection and Affordable Care Act (ACA), and as Republicans in the House of Representatives begin their effort to repeal or slowly dismantle the legislation, it makes sense to revisit some of the key fiscal issues surrounding health care reform.

The Concord Coalition's framework for evaluation of reform has focused on the fiscal risks of the legislation and its implementation. While as scored by the Congressional Budget Office (CBO), the ACA would slightly lower deficits and slowly decrease health care costs -- for the government and in the overall health care system -- there are numerous design risks and political vulnerabilities that could negate these positive effects.

Here are some of the key items to focus on as policymakers consider ideas to repeal, replace or reform the ACA.

I. Health care reform and the deficit.

The primary function of the ACA was to make health insurance available to the substantial segment of the population that was unable to get private insurance through their employer, was unable to afford private insurance at market rates, or was ineligible for government-provided health insurance through Medicare and Medicaid.

This was accomplished by expanding Medicaid and establishing a system of state marketplaces (exchanges) where the uninsured could purchase private insurance, with income-related government subsidies to make the insurance more affordable. Individuals will be required to obtain insurance if they do not have it, and the insurance they purchase will be more heavily regulated -- most notably with a prohibition of insurer discrimination based on health status, and with the elimination of coverage caps and the practice of rescission (where coverage is terminated during or following illness).

From the beginning, the fiscal goal of the legislation was to ensure that the coverage expansion, which would be expensive, would not add to the deficit over the 10-year budget window or beyond. To accomplish this, the legislation included spending cuts, penalties, fees and tax increases that ramp up over time as spending increases.

When taken together, the Congressional Budget Office (CBO) estimated that if the law was fully implemented as written, the cost of coverage expansion and offsets would decrease the deficit by $124 billion over the first 10 years (2010-2019).1 The CBO further estimated that the trajectory -- offsets slightly greater than costs -- would continue in the second 10 years producing additional deficit reduction on the order of 0.5 percent of GDP. It cautioned, however, that some of the cost-saving provisions would be difficult to maintain over time.

In addition to the direct costs and offsets, the ACA contains a number of demonstration and pilot programs designed to test the effectiveness of many promising strategies put forward by noted health care economists for controlling long-term health care cost growth. At this point, however, no one knows which provisions will be most effective. Furthermore, even if these experiments are successful, it is impossible to tell whether future politicians and health care system actors will allow those ideas to be broadly implemented.

Because of this tremendous uncertainty, the CBO did not count on savings from these elements of the legislation in its official scoring. Thus, the deficit reduction figures being widely dissected and discussed do not account for these segments in the legislation dealing with potential long-term cost control.

While much of the current debate over the deficit effect of the legislation centers on whether certain elements of the offset package will actually produce the assumed savings (see Section V below), two key points are important to keep in mind:

Deficit reduction is a highly uncertain artifact of the legislation's primary purpose -- a coverage expansion that is paid for. This fiscally responsible goal should not be abandoned in any attempt to repeal, replace or reform current law.

Even if the legislation reduces the deficit by the promised amount, it would hardly make a dent in total projected deficits over the coming decades. Much more work would remain to achieve a sustainable fiscal policy.

II. CBO's scoring: don't blame the umpire.

The ACA is an enormously complex piece of legislation and because of that, the CBO has continuously maintained that even more than on most pieces of legislation, its ACA estimates are "subject to considerable uncertainty." Furthermore, because CBO attempted to not just produce a 10-year score but also looked at longer term effects of the ACA, the uncertainty was even greater. Finally, as with any CBO estimate, it only analyzes the legislation as written and does not try to predict how future Congresses will act.

In this, the CBO has handled its health care analysis properly. It has been up front with the uncertainties inherent in such analysis. It also performed a valuable service in looking beyond the traditional 10-year scoring window for this piece of legislation. Because health care costs are the leading component of the nation's long-term fiscal challenge, anything that gives a better understanding of the legislation's longer term effects is helpful to those concerned with fiscal responsibility. And, as CBO Director Douglas Elmendorf recently wrote, there is "no plausible alternative" to scoring legislation as it is written.2 There would be no way for CBO to maintain its professionalism, independence and neutrality if it started including predictions of congressional or partisan behavior in the official scoring estimates. The agency did, however, produce an illustrative scenario in its most recent long-term budget outlook that showed the dire budgetary results if much of the long-term cost control mechanisms written into the bill fail to take effect or lapse.3

The most complete and up-to-date estimate for the costs and savings from the ACA will be released as part of CBO's annual Budget and Economic Outlook toward the end of January. There has been a recent preliminary cost estimate released for the legislation introduced in the House to repeal the ACA. In that estimate, CBO said the deficit effects of repeal are not exactly opposite the effects of the legislation in place, but are "similar in size."4 The main difference between the recent estimate and CBO's final cost estimate of the ACA when it passed, is that the new estimate covers the 10-year budget window going from 2012 to 2021.

In its estimate of ACA repeal, CBO suggests that deficits would increase by approximately $230 billion over the first 10 years. This measures just the effects of the reductions in direct spending for the exchange subsidies, combined with the increases in Medicare spending (since Medicare cuts were used as offsets in the ACA) and the cuts in the taxes that were used as offsets. Over the second decade, the even more uncertain CBO estimates are that repeal would increase deficits by about 0.5 percent of GDP.

In keeping with its original scoring, CBO assumed that all cost-saving and tax-raising provisions (to be repealed) would have otherwise been maintained despite any apparent difficulties in doing so.

Estimates for savings in future appropriations spending were not included in the official scoring of repeal (just as increases in appropriations weren't included in the initial cost estimates) because future appropriations depend on the actions of future Congresses -- which CBO cannot predict. However, as a rough guideline, CBO estimated approximately $10 billion to $20 billion would be saved in lower appropriations for the IRS and the Department of Health and Human Services because they would not have to implement and enforce the legislation.

Repeal would also cancel authorizations for future appropriations. Since there is not always a direct link between authorization and future appropriations, any savings from these cancellations are even more speculative. Furthermore, the legislation included authorizations for numerous activities only tangentially related to health care reform that were nevertheless folded into the large bill (such as for the Indian Health Service). Thus, while canceling the total amount of authorized appropriations would reduce spending by $106 billion from 2010 to 2019, $86 billion of that was for programs already in place that were renewed or extended by the ACA.

It is also true that estimates of the ACA's cost do not include the cost to fix the Sustainable Growth Rate (SGR) formula for physician payments under Medicare. However, there is no reason to expect this cost to be included, because the SGR formula was in place prior to enactment of the ACA, just as it is in place afterwards.

The SGR was created in 1997 to tie physician payments to physician costs and economic growth. It was a time of rapid economic growth and relatively lower health care inflation. It is thought that the brief "managed care" era at the time led physicians to decrease the volume and complexity of their services. So the formula initially worked well.

But the formula eventually began calling for larger and larger cuts to meet the target. Beginning in 2003, Congress has repeatedly postponed the cuts, and so the target gets further and further away from actual reimbursement levels. In December, 2010, Congress passed a bill postponing a 25 percent cut in doctor payments until 2012. At that point, the formula will call for a physician payments cut eclipsing 30 percent.

Ideally, a fix would have been included in overall health care reform, since the legislation did cut and reform other provider payments -- most notably by making them subject to the cost control efforts of the Independent Payment Advisory Board (IPAB). This is definitely an area ripe for more action by Congress in the future, because the patchwork fixes are expensive and unnecessarily delay a more permanent incorporation of physician payments into an overall cost control strategy. However, the fact that the "doc fix" was not included in the ACA does not make the deficit reduction of the legislation, or CBO's score of it, any less valid. It simply means that more needs to be done, regardless of the fate of the ACA.

Ultimately, even the modest deficit reduction over the first decade of the legislation requires policymakers to follow through on its politically difficult cost controls, such as cuts to certain parts of Medicare and a new tax on high-cost insurance plans to be implemented in 2018. This uncertainty and the minimal reduction of overall federal spending on health care beyond the first decade highlight the need to continually revisit reform and build in more cost controls in the future.

III. Repealing unpopular elements of reform, while keeping the popular ones, would leave fiscal policy in even worse shape.

Judging by federal budgetary history, entitlement programs tend to become more popular over time, while tax increases and spending cuts -- especially on patient health care and provider payments -- tend to be forever unpopular and politically difficult to sustain. Given this, the modest projected deficit reduction in the ACA is not dramatic enough to proclaim that its full repeal would be fiscally irresponsible. Repeal would eliminate a certain entitlement expansion paid for by more uncertain offsets.

However, stand-alone repeal would leave the nation facing an unsustainable status-quo, without even the preliminary framework for cost-control imposed by the ACA. Unless repeal supporters are prepared to quickly match those cost controls, or they have other ideas for lowering the nation's health costs, repeal leaves us at least two years closer to fiscal calamity without even the beginnings of attempts to figure out how to get a handle on rapidly growing health care costs.

Since full repeal is highly unlikely over the short term, opponents are focused on altering individual elements of the legislation. Perhaps no provision is more unpopular than the legislation's individual mandate to purchase health insurance, and because the mandate's constitutionality is being challenged in court, it could be eliminated sooner and more easily than the provisions that can only be eliminated through legislative action -- which would require getting through the 60-vote Senate and a Presidential veto.

Many courts have heard arguments about the mandate and while the U.S. District Court of Virginia has ruled against the mandate, others have found it constitutional. There are other cases outstanding, along with appeals of the ones already decided, and it is quite likely the Supreme Court will have the final say. No one knows at this point how the issue will ultimately be decided.

However, if the individual mandate is eliminated, the budgetary ramifications are quite predictable because it is a crucial leg in the stool of the expanded coverage provisions of the ACA. If insurers are no longer allowed to discriminate against the sick (a popular element of reform), healthy individuals would have an incentive to hold off purchasing insurance until they become sick, because there would be no reason to pay for health insurance until then.

If this occurred, it would lead to a sicker -- and thus, more costly -- pool of insured individuals. Insurance premiums would dramatically increase. Government spending would skyrocket as a result, because the ACA provides subsidies for individuals to purchase insurance. The individual mandate (an unpopular element of reform), by guaranteeing a healthier insurance pool, is what allows the new system to avoid this "death spiral" of increasing insurance costs.

If the courts rule against the mandate but leave the rest of the insurance market reforms and subsidies in place, Congress will be faced with the choice of a world with dramatically increasing premiums for constituents and dramatically higher government expenditures, or the need to pass new legislation addressing the insurance pool issue, which will likely spark intense partisan debate.

Another way to guarantee exploding federal deficits would be to leave in place the popular insurance reforms while repealing some of the individual politically difficult choices that have been made to pay for the legislation. Eliminating the Medicare Advantage program cuts, Medicare provider limitations, the excise tax on high-cost insurance plans, or the legislation's Medicare commission (IPAB), while leaving coverage expansion in place, would be an attack on the only items recognized by the CBO as actually decreasing health care costs.

Additionally, most health care experts agree that transforming our health care system into one that rewards quality health care as opposed to one that pays for quantity is crucial to slowing system-wide health care inflation. Maintaining or even strengthening the independent commission (IPAB) made up of health care experts to guide this transition in Medicare, with savings targets and the ability to enact changes on an expedited basis, is an important way to speed up this transformation, and in the process speed up efforts to achieve fiscal sustainability.

While one can legitimately argue that the law will end up costing more than anticipated or that some of the proposed savings will fail to materialize -- and The Concord Coalition is among those who have these concerns -- the best approach is to find ways of beefing it up rather than promising the public that we can really have something for nothing. As the recent reports from the numerous bi-partisan fiscal commissions have demonstrated, there are fiscally responsible ways to build upon the ACA's cost-control measures that would leave the nation in better shape than we are now to deal with the health care problem. The commissions have also suggested ways to re-organize the government's health care programs in ways not included in the ACA. One promising approach, based on the "premium support" model, has been put forward by House Budget Committee Chairman Paul Ryan (R-WI) and former Clinton administration budget director, Alice Rivlin.

Regardless of the specific approach, one lesson that policymakers should take from these outside reports is that coverage expansion involves trade-offs. If, as a society, we are not willing to pay more for health care or to substantially reorder the priorities of the current system, we will have to settle for a world in which many Americans are left without insurance and whose emergency care adds to overall costs.

The aging of the population and rapid growth of health care costs -- which are so devastating to the sustainability of Medicare, Medicaid, and the federal budget -- will not wait for politicians to bicker about past health care battles before deciding to tackle the issue again.

IV. Careful implementation is incredibly important in determining the ACA's fiscal legacy.

The nation's health care system equals almost 18 percent of all economic activity. Relative to the whole, the ACA's reach is perhaps not as sweeping as some critics have suggested and others have wished. However, it adds substantial federal and state government spending and regulation on top of an incredibly labyrinthine entity. So if we are to keep the big pieces of the legislation, it is in the nation's fiscal interest to ensure its provisions are fully and properly implemented.

This will, in some cases, require spending through the appropriations process that wasn't accounted for in the official CBO score of the legislation (see Section II above). Such spending will be fiscally responsible if it is used to best produce and enforce the goals of the underlying legislation. The idea that reform itself might die a slow and peaceful death if its implementation is hampered by underfunding, under-staffing and under-regulating, is faulty.

With so much money at stake for so many consumers, providers and insurers, having federal and state structures in place to prevent carve-outs and gaming of the system, will be crucial to making sure patients and taxpayers have their best interests represented.

Given the popularity of the larger aims of the legislation -- providing a widely available means for those without employer-provided insurance to obtain coverage -- failure to make the new initiatives work the first time is likely to encourage a citizens' backlash against their elected representatives. At that point, the easiest political fix might be to simply throw lots of money at the problem. Doing it correctly now -- in the context of fully implementing a comprehensive package -- is far preferable to future action taken while under political duress, when action would be quick and reactionary and with extra spending less likely to be paid for. The constant need to revise the SGR is an example of the reality of this risk.

The small and numerous cost control measures in the legislation will also be constantly vulnerable to interference and interest group pressure, as they begin to alter the incredibly profitable and inertia-backed fee-for-service system. There are hints that this pressure is already underway. A recent article in Kaiser Health News pointed to efforts to influence the rule-making process for the establishment of "accountable care organizations" (ACOs) -- one of the promising cost-saving reforms to the way health care providers organize.5

ACO's group networks of providers together so that they become more streamlined, cost conscious and effective, with the promise of receiving bonuses out of any savings that materialize. Yet the groups are trying to limit the importance of measuring their effectiveness in determining bonus levels, as well as trying to increase the amount of savings they will get to keep as a bonus. Insurers are fighting in the opposite direction, fearful that increased Medicare savings will cause providers to charge private insurers more.

How regulators balance these choices will go a long way towards determining whether these projects will achieve savings, whether they provide data on the scalability of the designs if expanded system-wide, and whether they ultimately can convince politicians and interest groups to allow their expansion if the other two criteria are met.

V. We have to keep our eyes on the long-term.

On paper, the ACA has led to a number of positive changes in the short- and long-term budget outlook. The CBO estimates that the legislation will reduce budget deficits over the 10-year and 20-year budget windows. Some health care economists believe it provides a good start on long-term cost control efforts. And, most strikingly, the annual report of the Medicare Trustees in August said that Medicare's finances have improved substantially.

However, the report then goes on to explain in great detail why this apparently good news is probably not as good as it sounds, and their conclusion is applicable to all evaluations of the ACA's influence on health care spending.

According to the trustees, "actual future Medicare expenditures are likely to exceed the intermediate projections shown in this report, possibly by quite large amounts.6 A separate memo prepared by the Center for Medicare and Medicaid Services (CMS) Office of the Actuary bluntly states that "the projections in the report do not represent the 'best estimate' of actual future Medicare expenditures."7 The trustees warn further, "The financial projections in this report indicate a need for additional steps to address Medicare's remaining financial challenges."8

The Trustees Report shows total Medicare expenditures are now projected to grow much more slowly. For example, Medicare is projected to equal 5.76 percent of the economy (GDP) in 2040 rather than the 7.96 percent projected in last year's report. The unfunded obligations of the program over the next 75 years have plunged to $22.8 trillion from $38.2 trillion, and the solvency of the Medicare Part A Hospital Insurance (HI) trust fund has been extended from 2017 to 2029.

However, even with these improvements -- assumed to occur as a result of health care reform -- Medicare's finances remain very problematic. If total expenditures increase as projected to 5.76 percent of GDP in 2040, it will represent a 60 percent increase from today. Increasing amounts of general revenues will be needed to pay promised benefits. This will put a growing strain on the rest of the budget, crowding out other priorities or forcing higher taxes.

Even the extra dozen years of Part A trust fund solvency still leaves that part of the program insolvent by the time people who are now age 46 and younger qualify for benefits.

It is also important to note that the improvement in Medicare's finances does not translate into a sustainable path for the federal government's long-term budget outlook. Most of the ACA's Medicare savings and added payroll tax income have been dedicated to Medicaid expansion and exchange subsidies. In other words, the health care legislation does not "bank" its Medicare reforms for future Medicare expenses.

However, the most significant caveat noted by the trustees is that two key assumptions in the official projections are not realistic.

The first of these assumptions is that Medicare SGR for physician payments will be followed, starting with a 30 percent cut over the next three years. The second questionable assumption is that annual adjustments to non-physician provider payments will be limited to the growth of economy-wide productivity. This change was a major cost-saving initiative in the ACA. However, productivity gains in the health care sector have generally not kept pace with economy-wide gains. So maintaining this new standard would necessitate substantial and continuous efficiencies. The CMS actuaries estimate that payments would be 28 percent lower after 30 years than under the pre-ACA law and 56 percent lower after 75 years.

In the actuaries' view, "neither of these [payment] update reductions is sustainable in the long range and Congress is very likely to legislatively override or otherwise modify the reductions in the future to ensure that Medicare beneficiaries continue to have access to health care services."9

In short, much of the apparent improvement in Medicare's finances may prove to be illusory.

To illustrate the magnitude of the difference between a strict application of "current law," as assumed in the official report, and what may happen if the long-term savings assumed in the ACA prove untenable, the Office of the Actuary prepared an alternative scenario in which physician payments are allowed to increase with medical inflation, and the changes in non-physician payment updates are phased out after 2019.

In this alternative scenario, Medicare's finances still show improvement but not by nearly as much. To use an earlier example, total Medicare costs in the alternative scenario would rise to 7.34 percent of GDP in 2040 rather than 5.76 percent under current law. This would not be a substantial improvement over last year's report, which projected that Medicare would reach 7.96 percent of GDP in 2040.

The issue is not whether efficiencies from payment update reductions are possible or desirable, but whether it is reasonable to assume that payments can be ratcheted back by as much, and for as long, as projected under the new law. So while the new formula might work for some time at encouraging efficiencies, it is probable that the imposed constraints might become so great that the formula would need reform.

It is possible that other initiatives in the ACA will enable and encourage cost-cutting and productivity increases. The experiments in shifts away from fee-for-service medicine and the investments in comparative effectiveness research and health information technology were designed for that purpose. However, the savings from those efforts are far from certain because, as noted by the trustees, "specific changes have not yet been designed, tested, or evaluated."10 The trustees, like CBO, are thus appropriately cautious about the degree to which those changes will enable Medicare providers to continue operating under a system that continually cuts reimbursements below what, until now, has been an ever-growing trajectory of health care inflation.

None of this is to suggest that setting tough budgetary constraints and targets is a bad thing -- after all, without them efficiency and productivity gains are even less likely (as our current system proves). What it does suggest is that policymakers and the public should not be too quick to celebrate what, on paper, appears to be good news. Viewed more fully, the trustees' report is yet another wake-up call as to how much more needs to be done just to approach, much less exceed, the new projections.

This provides a caveat to repeal without replacement. As the actuaries' memo observes, the trustees' report should serve "as illustrations of the very favorable impact of permanently slower growth in health care costs, if such slower growth can be achieved…(but) expectations must be tempered by awareness of the difficult challenges that lie ahead in improving the quality of care and making health care far more cost efficient" (emphasis added).11

Policymakers who either trumpet the "good news" in the trustees report, or repudiate any possible fiscal benefits from the ACA, must accept responsibility for maintaining the trustee's report's favorable outlook by using a pay-as-you-go basis for any changes. The temptation will always be to not do so, but that is the path to fiscal ruin -- the path that current reformers and current critics claim they are attempting to avoid.